Garment Opportunity

Italian Discounter Expands in Germany

  • Why it matters

    Why it matters

    The growing discount garment sector is creating new opportunities for low-cost retailers that may have failed to gain traction in the past.

  • Facts

    Facts

    • In late 2016 OVS took over the troubled Swiss Charles Vögele group and their 280 German stores.
    • Last year OVS subsidiary Upim had a turnover of €203 million, delivering an operating profit of €17.5 million.
    • The Italian company’s first move into the German market in 2001 failed.
  • Audio

    Audio

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OVS  Window Display, Milan, Italy
It's all change as discounters ruffle up the fashion sector. Source: Getty images

The Italian fashion outlet OVS is sharpening up competition in the German market for discount fashion.

Over the course of the year more than 100 outlets of its brands Upim and OVS are to open across Germany, Handelsblatt has learned, in part by converting outlets of the Swiss chain Charles Vögele that it acquired late last year.

Both OVS, which could be described as an H&M for older customers, and Upim, are aimed at the price-conscious shopper.

At the end of 2016, OVS took over Switzerland’s troubled Charles Vögele group, and with it their 280 German stores. It soon became clear that the Charles Vögele brand had no future on its own.

Many of the stores will be sold off, but others will become part of the Italian firm’s new push into Germany. It will be their second time making the risky move into Europe’s largest economy.

Lucky for them, the German market for cheap fashion has changed.

“Upim is entering the market in direct competition with garment retailers like Takko and Kik.”

Beate Hölters, Consultant, Tailorit Düsseldorf

According to the deal offered to Charles Vögele shareholders, OVS had planned to sell most of Charles-Vögele’s German operations. That has only happened in part. Between 40 and 60 of the storefronts will be sold to rival KiK, Germany’s second-largest clothing retailer behind H&M. Another 44 shops will go to Woolworth, while rival discounter Tedi is also negotiating over a larger number of premises.

OVS will be left to run the rest of the locations. A company spokesperson told Handelsblatt the decision which of its brands should replace the doomed Swiss label at which locations would be made in the next few months. OVS will make its decision based on location, store size and expected turnover, according to the spokesperson.

It might be partly out of necessity, but OVS’s decision will still create new competition for bargain basement garment retailer Kik.

“Upim is entering the market in direct competition with garment retailers like Takko and Kik,” said Beate Hölters, partner at the business consultancy Tailorit in Düsseldorf.

Despite low prices, bargain fashion is a lucrative market, in Italy as well as in Germany. Indeed, in Italy, Upim only generates an average branch turnover of around €1,000 per square meter. “That’s less than comparable competitors who generate €1,500,” Ms. Hölters said. But, she told Handelsblatt, the company still registers relatively high profits.

In the last business year, Upim had a turnover of €203 million ($217.8 million), delivering earnings before interest, tax, depreciation and amortization (EBITDA) of €17.5 million ($18.8 million). That’s a profit margin of 8.6 percent in a market where many competitors are struggling to survive.

Rival Kik managers know that OVS has already tried to break into the German market once and failed.

Retailer Kik, long established on the German market, told this newspaper it doesn’t see Upim as a direct rival. The style is different, aimed at a different target group, they said, adding that Upim’s prices are also higher. And Kik managers also know that OVS has already tried to break into the German market once and failed.

The Italian firm’s first attack on the German market fell through in 2001 after it took over 99 locations of the chain Kaufhalle from the Metro group. After changing these into the value retail brand Oviesse, the turnover collapsed. While Kaufhalle had been turning over around €700 million, Oviesse struggled to bring in €145 million and after just three years, the Italians shut up shop and pulled out of the German market.

This time could be different. While high-end boutiques are closing their doors, the garment discounters are celebrating their successes. The Irish chain Primark, for example, opened its first branch in Bremen in 2009 and now has 20 outlets and an estimated turnover of more than €750 million. The U.S. chain TK Maxx, which entered the German market in 2007 and deals in remainders of designer brands, makes a similar turnover.

Customers are paying close attention. In the middle of the last decade, around three quarters of consumers thought the prices of fashion were too high. In the meantime, this percentage has fallen dramatically. A survey by the market research firm GfK, for the sector’s industry journal Textilwirtschaft, found that only 41 percent of respondents ticked the response “Clothing is altogether too expensive – it should be generally cheaper.” That’s the lowest response since the beginning of the survey in the year 2000, according to the journal.

German discounter Kik has also profited from the rise of the discount garment trade.

“We’ve had an extremely good year in 2016,” Kik’s chief executive Patrick Zahn told Handelsblatt. Although he didn’t quote any specific figures, he said that the company was already close to matching the 8-percent profit margin of the year before.

And the growing competition hasn’t dampened his confidence. He plans to open 70 new stores in Germany this year, in addition to the newly-acquired Charles Vögele outlets.

 

Florian Kolf leads Handelsblatt’s coverage of the retail sector. Georg Weishaupt writes about luxury goods for Handelsblatt. To contact the authors: kolf@handelsblatt.com, weishaupt@handelsblatt.com

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